Lack of Investment Strategy Necessitates Professional Help

By Lee Hyo-sik
Staff Reporter

Despite billions of dollars in losses from investing in equity funds over the past year, retail investors should continue to entrust money to professionals, says a European asset management professional here, stressing that individuals cannot beat the market.

Andreas Neuber, CEO of UBS Hana Asset Management

In an interview with The Korea Times, CEO of UBS Hana Asset Management Andreas Neuber said individuals can not perform as well as institutional investors and their foreign counterparts because they do not have the right investment strategy.

``Many retail investors tend to become more emotional when the market goes up and down, compared to professional investors, because they do not have an investment strategy. Even if they have one, they do not follow it. So, many buy shares at the peak and sell at the bottom. Simply put, they cannot beat the market,'' Neuber said.

He commented that individual investors would be better off putting money into equity funds managed by trusted professionals, particularly under current market conditions.

``Among major bourses around the world, Korea was the only country that saw its stocks rise in January. But it is a liquidity-driven technical rebound, not the start of a genuine market rally. To achieve sustainable upward movement in share prices, investor confidence will have to be restored first,'' the CEO noted.

He warned that the local bourse will continue to remain bearish in the first half of the year amid worsening corporate performances, weighed down by the ongoing worldwide economic downturn.

``I also do not share enthusiasm about the second half. Many people say market conditions will improve in the latter half. But I expect the market to remain sluggish and there will be no drastic recovery,'' Neuber said.

He noted, however, Korean stocks are highly undervalued at the moment compared to other major bourses, adding there would be plenty of opportunities for equity investors to make money down the road.

``Under the current market environment, individual investors should analyze their financial status. If they have debts, then they should pay them off first. For those who have extra disposable income and a long-term investment horizon, they should buy stocks now,'' the CEO said, stressing investors willing to hold shares for more than five years will realize handsome profits.

Neuber then said shares in the finance, consumption and transportation sectors are more attractive than IT and construction stocks.

Touching on effective household strategies to cope with slower income growth and declining asset values amid worsening economic conditions, he said families first need to figure out what assets and debts they have.

``People will then realize they have more assets than they previously thought. They should first pay off debts and if they are risk tolerant, they may want to think about investing in stocks over the long term. But now, the majority of Korean households have a zero risk appetite. They are advised to put cash into principal-guaranteed investment vehicles, including money market funds and bonds,'' Neuber said.

But the reality is that more households are grappling with rising debts and a lack of cash with many defaulting on their liabilities, hitting banks and other financial firms hard.

``Surging household bankruptcies could cause another liquidity crunch and the consequent financial market turmoil here In response, banks are tightening lending standards to improve their financial soundness and reduce non-performing loans, putting a heavier financial burden on families and making it more difficult for them to borrow,'' the CEO said.

According to the Bank of Korea (BOK), the average debt per household hit a record high of 40.54 million won in September, 2008, up from 39.6 million won in June. The outstanding balance of total household debts ― loans for households extended by financial institutions plus credit purchases ― reached 676.3 trillion won, up 15.7 trillion won from three months earlier.

Additionally, the average delinquency rate of the nation's five largest credit card issuers ― Samsung, Shinhan, Hyundai, BC and Lotte ― stood at 3.43 percent in December, up from 3.28 percent three months ago, according to the Financial Supervisory Service (FSS).

Won to Remain Weak Against Dollar in 2009

When asked about the won-dollar rate this year, Neuber said the Korean currency will remain weak against the greenback, citing the increasing current account deficit and domestic banks' payments of short-term overseas borrowing.

``The government and the central bank said the nation will post a current account surplus this year, betting on stronger exports and falling import prices of oil and other raw materials. But its outbound shipments will decline at a much faster clip than previously expected. Additionally, lenders will need dollars to pay back overseas borrowing, putting downward pressure on the won,'' the CEO said, putting the average won-dollar rate for 2009 at around 1,300 won.

Korea recorded a $6.41 billion current account deficit in 2008, marking the first shortfall since 1997 when the deficit reached $8.3 billion in the wake of the Asian financial crisis. But this year, the central bank projected the nation will post a current account surplus of around $22 billion, while the Ministry of Strategy and Finance put the surplus at $13 billion.

However, from next year and beyond when the dollar begins circulating in the international financial system, Neuber said there will be an abundant supply, causing inflation worldwide and putting downward pressure on the hard currency.

``The dollar will go down in value in a year or two. Then people and businesses will begin coming back to the market and put money into stocks, real estate and other tangible assets,'' he projected.

Worldwide Stimulus Steps Yet to Bear Fruit

Touching on the Korean government's response in dealing with the ongoing economic crisis, the CEO said governments around the world have moved quickly to ease the fallout of the economic downturn by introducing a range of stimulus measures, including the provision of capital to the financial sector and massive public infrastructure development projects.

``The Bank of Korea and other central banks have also lowered interest rates to slash borrowing costs and boost monetary circulation in the economy. However, such liquidity boosting measures over the past few months have failed to achieve their intended goals because the liquidity has largely been trapped in the financial sector, not flowing into the broader economy'' Neuber said.

He said banks do not trust businesses and are extremely concerned about their financial soundness and the size of non-performing loans, adding companies and households are angry at banks that they do not get credit from lenders when they need them the most.

``Unless banks, businesses and consumers start trusting one another, money will largely be stored in the vaults of financial firms. This drives the government and the central bank into a difficult position. They feel like they need to take further steps to ease the economic slowdown. But they first need to find out what impact earlier measures are having on the economy,'' the CEO said.

Neuber said the initial steps have not borne fruits yet and that it will be hard for Korea and other countries to introduce more policy measures to prop up the economy.

``As for the immediate outlook for the Korean economy, it could be more severely hit by the ongoing crisis, compared to the currency crisis a decade ago, because the entire world is suffering. Ten years ago, the nation was able to recover quickly by exporting more goods overseas, but at the moment, everybody is taking heat and no economy in the world is resilient enough to absorb Korean goods,'' he said.

Deregulation, Transparency Crucial for Financial Hub Plan

Neuber said deregulation, transparent legal and regulatory systems, and other hard factors are the key to attracting foreign investment and boost the nation's ambitious plan to transform itself into an Asian financial and business hub.

``International investors look at various opportunities, the business environment, regulation and market size when making investment decisions. They want to operate under free market economy principles, and transparent regulatory, legal and taxation systems. Above all, deregulation is most important in the eyes of foreign investors,'' the CEO said, stressing priority should be given to hard factors for attracting investments from outside, not to soft factors such as the residential and educational environment.

He said Korea wants to become a financial center in Asia because it needs new growth engines for the future. Currently, the nation is a manufacturing-based economy, heavily dependent on external trade. It wants to transform itself into a knowledge-based services economy that produces high value-added goods and services, Neuber said, adding that a major part of this is an advanced financial industry.

``I highly respect the Korean people. They can achieve whatever they want to. The nation rose from the ashes of the 1950-53 Korean War and rebounded quicker than other Asian economies from the currency crisis 10 years ago. But the problem is that all Koreans do not want to turn the nation into a financial center,'' the CEO said.

He said there is a huge gap between the government and the public over the issue, adding policymakers and financial industry leaders should make more efforts to better communicate with people and publicize why Korea needs to become a financial hub in Asia.

``When the public is behind the plan, Korean will achieve it quickly,'' Neuber said.

As for UBS Hana Asset Management's plan for this year, he said the company will continue to build on the depth and breath of its product pipelines. ``In 2008, we successfully concluded the establishment of our investment platforms ― both fixed income and equity. Thanks to a joint venture structure, we are one of the few asset management firms here that can provide a truly comprehensive product offering,'' the CEO stressed.

Given the prevailing market circumstances, he said the asset manager expect domestic equity and fixed income products to be in the spotlight this year, adding it will also consider introducing products investing in corporate bonds. The company has 19.5 trillion won in assets under its management as of January.

leehs@koreatimes.co.kr

Who is Andreas Neuber Before coming to Korea in July 2007 to become CEO of UBS Hana Asset Management, Andreas Neuber was responsible for UBS Global Asset Management’s strategic initiatives in the Asia Pacific region in Hong Kong from April 2006 to July 2007. Before coming to Asia, he was in charge of institutional and wholesale business activities as well as strategic initiatives in a number of European countries, including the Netherlands, Luxembourg and Austria, from January 2004 through April 2006. Prior to his career at UBS Global Asset Management, Neuber spent five years as head of Commerzbank SGR and managing director of Commerzbank Asset Management Italia in Rome. In the latter position, he was responsible for the launch and management of a financial group in Italy. Before this, he was based in Frankfurt where he managed Commerzbank AG’s worldwide merger and acquisition activities in the asset management industry. He also developed and implemented new structures and strategic projects within the asset management department. In 1993, Neuber received a bachelors degree in business administration from Munich University of Applied Science in Germany.